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Recession-hit solicitors struggling to make a living

Tue, Sep 20, 2011, 01:00

CAROL COULTER

THE LAW IN CRISIS:MANY MEMBERS of the public have experience of over-charging and poor service from lawyers. The Irish Times has heard numerous credible tales of solicitors charging what appear to be arbitrary (and huge) amounts, refusing to progress wills, of leaving cases idle for months and, when cases are concluded and fees paid, taking a further slice off awards paid to plaintiffs.

Unhappy clients have found the Law Society’s complaints procedure legalistic and off-putting, though, as the consequences of adverse findings are serious, the disciplinary committee must abide by fair procedures. So there is little sympathy for lawyers among the public and disbelief when it is suggested that some are not making a living.

Yet many are struggling, especially in the smaller firms that provide a legal service to the public. It is becoming increasingly difficult for one- and two-person firms to survive as increasing overheads meet declining fee income.

Their bread and butter has always been property transactions, whether conveyancing or arising from death or family breakdown. Not only has conveyancing collapsed, the fact that no one is selling or buying property has had knock-on effects on family law and probate.

In addition, many solicitors became directly involved in the property business, sometimes entering into partnerships with clients. A lot of these deals have gone sour leaving all concerned, including the solicitors, with huge liabilities. A minority were less than scrupulous in their dealings, giving undertaking to banks that were not properly established or dipping into clients’ accounts to finance transactions. These cases are now wending their way through the courts.

All of this has exposed the solicitors involved to very hefty insurance claims, some of which run to tens of millions of euro. That in turn has led to an explosion in professional indemnity insurance for all solicitors, including those with minimal property dealings and with no claims history.

The Solicitors Mutual Defence Fund has collapsed with liabilities of €170 million. Typical insurance for a small one- or two-person firm has risen from €5,000 or €6,000 annually to about €20,000. A recent survey by the Dublin Solicitors Bar Association found insurance to be the biggest area of concern to solicitors.

This increase comes at a time when fee income has collapsed due to the absence of property transactions, the overall downturn in the economy and the fact that clients cannot – or will not – pay the level of fees being paid in the boom.

Yet solicitors who wish to leave practice are caught in a bind. They must still be covered by insurance to meet future claims, so they must continue to pay “run-off” insurance for years after leaving practice. Many simply cannot afford to and, as self-employed people, cannot claim unemployment benefit if they retire early. The insurance issue will be rectified later this year by the creation of a “run-off” insurance pool, which is likely to prompt a wave of early retirements.

Meanwhile, some solicitors live on a different planet. These are the lucky ones who work for the big firms, whose clients are the State, big multinationals and the financial industry and who provide a highly specialised, 24-hour 365-day service.

The so-called “Big Five” firms – Arthur Cox and Co, A L Goodbody, McCann Fitzgerald, Frys and Matheson, Ormsby Prentice (MOP) - have little or no interest in individual clients, except occasionally those directors or executives of big companies who may have a personal problem. They operate in the international, not the Irish, legal market, where they compete not only with each other but with international legal firms.

About 20 per cent of their income comes from the international investment funds industry and the rest from inward investment, taxation, mergers and acquisitions and the State. Their fees and earnings are very high, although no one knows exactly what they are, as all of them are very reticent on this subject.

Informed sources estimate the income of senior parties in these firms in seven-figure sums. The earnings of junior partners and associates (employed solicitors) are substantially less, but are still much higher than those working in family firms even in the good times.

They have not been immune from the crisis. Profitability has taken a hit because they all had work in the commercial property area and some are tied into expensive rents on big trophy buildings. However, they have benefited from increased work in areas like litigation, restructuring and, of course, Nama, but clients are seeking fee cuts.

Between these two very different worlds lie a number of medium-sized firms, most of which combine commercial work or work for the State with servicing members of the public and small businesses. Their fortunes have been mixed, depending on their exposure to property and the versatility of their service.

David Rowe of Outsource provides business management advice to a number of solicitors’ firms said many small and medium firms are struggling. He noted that 70 per cent of insurance claims were from financial institutions who were poring over transactions in hindsight to see if they could find holes in them. “Even good firms have claims against them, sometimes spurious,” he said.

There would have to be changes in the future, but this would not be easy, he said. “You need to have economies of scale and a mixture of skills – good managers, good getters of work, good do-ers of the work. You can’t dabble in everything.”

This should mean mergers between two or more small firms, but so far these are relatively rare and there can be insurance obstacles. “If one firm had a good claims record and the other a bad one, the insurer will look at the bad one.” He added that there were too many solicitors chasing too little work. “There are 7,500 solicitors trying to earn a living from private practice. There is work probably for 5,000.” The average small law firm costs between €100 and €120 an hour to run before it makes any money.

“In general, legal salaries are down 15-20 per cent. They’ll have to come down more, the cost base is still too high,” he said.

Ken Murphy, the director general of the Law Society, agreed that life was grim for many qualified solicitors.

There are 1,100 unemployed solicitors known to the society and this is likely to increase as the year goes on and more qualify. In addition, he said that a recent society survey showed that about 1,500 were unhappy in jobs that are temporary or unrewarded.

Yet many young people still want to be solicitors. Today 411 trainee solicitors begin their training in the Law Society. In 2006 there were 672.

These are the lucky ones. You can only enter the Law Society law school if you have an apprenticeship, which have been more and more difficult to get in recent years. Those who qualify will have to work harder for much less than was expected a few years ago, and many will emigrate.

But, according to Mr Rowe, there is a future for a restructured profession. “It will take a couple of years for insurance to settle down and then there will be mergers.”

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